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Fifth Circuit holds that owners of vessel sailing to New Orleans during Hurricane Katrina acted negligently.

On August 25, 2005, the vessel CHIOS BEAUTY, owned by Defendant Chios Shipping and operated by Harbor Shipping & Trading, S.A. ("Harbor Shipping"), departed Vera Cruz, Mexico bound for New Orleans, where the vessel was to load a cargo of grain. The vessel was equipped with NAVTEX and IMARSET, technology providing worldwide weather reports and satellite-based weather information, respectively. On August 26, 2005, Harbor Shipping instructed its agent to bring the vessel into New Orleans. That same day, the National Hurricane Center ("NHC") issued two advisories, predicting that the hurricane would affect the 400-mile stretch of coastline, including New Orleans. Additionally, on August 27, 2010, the National Hurricane Center issued another advisory placing New Orleans in the center of the hurricane. Later that day, the CHIOS BEAUTY moored at a wharf across from numerous barges and tugboats owned by the Plaintiff. During the hurricane, the vessel's lines snapped and the CHIOS BEAUTY was carried across the river, alliding with the Plaintiff's barges and tugboats.

Plaintiff commenced an action in the Eastern District of Louisiana Court against the CHIOS BEAUTY, in rem, Chios Shipping and Harbor Shipping, and the District court ordered the arrest of the vessel. Thereafter, the parties negotiated the terms of a letter of undertaking, which was memorialized on September 12, 2005, securing the release of the vessel. After a five-day trial, the District court, applying a regular negligence standard of care, determined that the defendants were negligent by "failing to prudently monitor and interpret the available weather information," and sailing the vessel into the path of the hurricane when it had sufficient time to divert its path. Accordingly, the District court entered a final judgment against the defendants in 2008 in the amount of $5,500,000.00, including pre-judgment interest and post-judgment interest. In august 2009, Plaintiff made a post-judgment motion to amend the judgment to allow for interest to run against the vessel in rem in excess of $5,500,000.00. The District court denied Plaintiff's motion, finding that in rem recovery was capped at $5,500,000.00. Accordingly, on May 4, 2009, the District court entered its final judgment awarding Plaintiff $4,726,601.15 in damages, including pre-judgment and post-judgment interest, but limiting in rem recovery to $5,500,000.00. Both parties appealed.

On appeal, the Fifth Circuit Court of appeals focused on the following three issues: (i) whether the district court applied the appropriate standard of care; (ii) whether the district court clearly erred in making factual findings; and (iii) whether Plaintiff is entitled to interest on the letter of undertaking. We summarize the Court's analysis of each issue below.

Standard of Care

The Defendants argued that the district court should have applied a heightened in extremis standard of care when evaluating whether the defendants acted negligently (rather than the regular negligence standard of care it applied). While recognizing that a heightened in extremis standard applies when the "vessel is put in the very center of destructive natural forces," the Court held that this standard will not apply when the captain had sufficient time to avoid the peril. (citing Employers Ins. of Wausau v. Suwannee River SPA Lines, Inc., 866 F.2d 752, 771 (5th. Cir. 1989). Here, the Court held that the defendants had "ample time to run to a safer port in the western Gulf," and that that captain had access to updated weather information. Accordingly, the Court held that the in extremis standard was inapplicable to the facts of this case, and that District court applied the correct standard of care in making its determination.

Factual Findings

The Defendants additionally asserted that the factual findings made by the District court were erroneous. Specifically, the Defendants argue that the District court's determination that New Orleans would receive a "direct hit" from the hurricane was incorrect. The Fifth Circuit reviewed the district court's factual findings for clear error. (citing Theriot v. United States, 245 F.23d 388, 400 (5th Cir. 1998). The District court based its determination on the advisories from the National Hurricane Center ("NHC"), as well as testimony from the Plaintiff's navigation expert.  The Fifth Circuit concluded that the district court's findings were not clearly erroneous – even though the NHC advisories were predictions and subject to uncertainty, they "were the best available forecast" of Hurricane Katrina's path.

In Rem Interest

Finally, Plaintiffs appealed the District court's denial of their post-judgment motion to increase the amount of the letter of undertaking. The District court based its decision on language in the letter of undertaking providing that security on the vessel would be "inclusive of interests and costs." The Fifth Circuit looked to Rule E(5) of the Supplemental Rules for Admiralty and Maritime Claims, which allows for the release of an arrested vessel if either: (i) parties stipulate to the amount and nature of security; or (ii) if the parties cannot agree, the court may determine the amount of the bond sufficient to cover plaintiff's claim. Additionally, Rule E(5) provides that the security "shall be conditioned for the payment of the principal sum and interest thereon at 6 percent per annum," whether the security is fixed by the parties or the court. 

Defendants argued that the "inclusive of interests and costs" language constituted a waiver of Plaintiff's right to security conditioned on payment of the principal sum plus 6 percent interest per annum. Alternatively, Plaintiffs maintained that the letter of undertaking was not a stipulation as to the amount of security, and accordingly, they did not waive their right to condition the letter of undertaking on accrual of interest.

The Fifth Circuit, applying standard contract principles, found that the "inclusive of interests and costs" provision in the letter of undertaking does not constitute a waiver of the Rule E(5) interest. In particular, the Court focused on the fact that the parties disagreed regarding the value of the vessel and allowed the District court to determine that principal sum. Once the principal sum was set by the District court and the vessel released, the letter of undertaking "shall be conditioned for the payment of interest at 6 percent per year."  Accordingly, the Court did not address the arguments presented by the parties regarding the issue of whether the interest provision of Rule E(5) may be waived.

Furthermore, the Court stated that the Plaintiff requested the wrong relief from the district court. The Plaintiffs moved for an increase in the value of the letter of undertaking, to allow for interest to run against the vessel in rem. However, based on Rule E(5), the amount of security may not exceed the value of the vessel, absent fraud or misrepresentation. Accordingly, the value of the letter of undertaking could not be increased, and the letter of undertaking is conditioned upon the payment of 6 percent interest per annum (since the date the letter of undertaking was memorialized). Plaintiffs may recover for their damages (including pre-judgment and post-judgment interest) from the present value of the letter of undertaking (i.e. – the principal sum plus 6 percent interest per year since September 12, 2005).

The Fifth Circuit remanded the case to the District court to determine: (i) the present value of the letter of undertaking; (ii) the present value of Plaintiff's judgment; and (iii) to enter an order setting the Plaintiff's total amount of recovery in rem.

Read a copy of the decision

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